Regulation, Re-imagination and the Recession

Just when you thought it was safe to spend that extra bit of cash comes the news that South Africa is officially in its first recession since 2009. It’s a nasty blow to consumers, especially those who are already classified as financially vulnerable.

Many will be asking what this means for the country’s high levels of debt. Ordinary South Africans are already struggling to afford basic necessities - could the recession spark off even more payday loans and visits to mashonisas for quick and easy access to money?

The obvious answer to the dreaded R word would seem to be the other R word - regulation. Indebtedness can quickly spiral out of control in times of economic downturn, and regulators might feel inclined to further tighten regulations to help slow down the spiral.

There’s just one problem: in a society like ours, where so much of our future socioeconomic success relies on SMEs and microentrepreneurs, more regulation may not have the desired outcome. Many entrepreneurs and informal traders already don’t have access to documents like payslips and business documents that are required to apply for loans. Our informal industry, estimated to support over a quarter of all South African workers, is effectively being denied access to credit, and economic growth is being stifled in the process.

It was only a few months ago that the Western Cape High Court ruled that certain provisions in the National Credit Act – specifically those requiring people to produce bank statements or payslips to apply for a loan – were discriminatory against less privileged South Africans. The judge was swayed by the example of a hypothetical flower seller in Adderley Street who couldn’t access credit because he lacked formal documentation.

Even though this ruling doesn’t do away with the need for businesses to exercise due diligence and conduct proper risk assessments there’s a greater burden on them to balance responsible credit granting with reasonable access to capital and funds. Now, more than ever, we need to find a way that looks at affordability and credit-worthiness holistically.

Flowers for Adderley

Although South Africa’s consumer health has improved in recent years, large gaps remain. Almost three quarters of the country’s active credit participants are impaired or under financial stress. Only around 25 million of our population have access to credit facilities. The unemployment rate is a hefty 26.7%.

With the recession, there’s a high possibility these numbers will continue to get worse. Our current lending models say that these people shouldn’t be afforded credit. But what if we knew which of these so-called credit risks were on a path to become more financially stable and consequently financially included in an economy that is driven by consumer industries? What if we could tell the difference between the reckless spender going through credit card after credit card, and the consumer who’s just fallen on hard times?

Let’s go back to our hypothetical Adderley Street flower seller. Although he might not have a formal business address or even a banking account, he does have a cellphone, which he uses mostly to WhatsApp his family, friends and customers. He takes a taxi to work each morning. He buys lunch at the local café daily. His favourite flower is the daisy, because it reminds him of the first date he went on with his wife.

“Yes, yes, but what’s all this got to do with his credit-worthiness?” you might ask. As Sherlock Holmes or Hercule Poirot might respond, seemingly minor details can tell you a lot about a person.

We know, for example, that married people are more likely to be cautious with their finances. Eating high-cholesterol kotas and Russians every day could mean our flower seller is saving less and incurring more medical expenses. Perhaps the regular taxi-goer might benefit from a second-hand bakkie to being able to expand his business beyond Adderley Street. Put all the tiny details together, and you’ve got a much richer picture of a person than three-months of bank statements could ever give you.

Being human

The use of data analytics to generate credit scores is, of course, a standard part of any credit provision process. But the question I’d pose to any credit provider is: do your existing KYC processes live up to the name? Or are you falling into the trap of gathering only a few official data points without the “irrelevant” data that creates a portrait of a living, breathing human being in reality?

Just because someone’s not in a good position to afford a loan now doesn’t mean that they’re not on track to be so later when the recession is over. And just because a person doesn’t have a credit footprint doesn’t mean they don’t have a rich history of behaviour from which we can draw insights. People change, environment matters, and no-one is defined by their last bank statement.

Non-financial data, like where someone is employed, where they live, where they went to school, and what they like to spend their time doing has a huge role to play in building less judgmental, more realistic lending systems. By using a broad swathe of trended and alternative data, it’s possible to bring humanity back into the lending process. We’ve seen it work in other developing nations like India and Colombia, and now it’s time we look at making it work here in South Africa.

Spotify’s Richard Frankel said it best: “If content is king, context is god, and data is its religion.” Where business intelligence strategies often fall short is that they fail to take into account contextual clues. They sketch in crayon when they should be creating a life portrait.

Adapting to the new regulations means infusing your credit provision and data acquisition strategies with emotional intelligence.

Now is the time for credit providers to transform their customer data strategies to meet the very real needs of traditionally marginalised consumers in times of high financial stress. It’s time to treat data with the respect it deserves, so you can treat people with the fairness they deserve.

In thinking about financial inclusion, we need to consider that a large section of our population is still excluded and that our ability to bring them into the financial mainstream will require us to re-imagine well established processes and methods of banking.  Do you believe that South African businesses are challenging their orthodoxies and are redefining their very business models amidst a highly prevalent digital world?

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